Purchasing insurance is an example of which risk management strategy?

Purchasing insurance represents the transference of risk from an individual or business to an insurance company. By obtaining insurance, the insured party pays a premium to the insurer in exchange for the promise to cover potential financial losses that may arise from specific risks, such as accidents, natural disasters, or health issues. This strategic move reduces the financial burden that could result from unforeseen events, effectively transferring the responsibility of managing those risks to the insurer.

Through this process, the insured party can focus on their primary activities with greater security, knowing that they have a backup plan in place if something goes wrong. Transference is particularly important in risk management as it allows individuals and businesses to protect their assets and mitigate the financial impact of risks without entirely eliminating the underlying risks themselves.

While mitigation involves taking steps to reduce the severity or impact of a risk, avoidance entails eliminating the risk entirely, and acceptance means acknowledging the risk and its potential consequences without taking proactive steps to address it, these strategies differ significantly from transference. Only transference through insurance allows for a formalized method of shifting the financial liability associated with risks to another party, making it the correct answer in this context.